First off, who’s Larry Summers? He is a very well-known macroeconomist, professor at Harvard, and former Chief Economist at the World Bank. He’s also the most prominent economist connected to the Democratic Party. He served in the Clinton administration, and ended up as Secretary of the Treasury. He was also involved early in the Obama administration, where he served as Director of the White House’s National Economic Council.

But, Summers is also the macroeconomist who is not popular with the progressive side of the Democratic party. First, Summers was President of Harvard, and was forced out for voicing an opinion that is politically incorrect but not terribly controversial outside of academia. Second, Summers offended many White House staffers by pointing out (repeatedly) that, for want of a better term, they needed more adult supervision. Third, Summers was Obama’s first choice to head the Federal Reserve, but his name was removed because progressives wouldn’t support him.

So, what’s in Summers’ essay? Broadly, he’s worried that technological improvement is reducing opportunities for those with less skills. Historically, this is a new thing. Technology has generally augmented the productivity of workers. But we’re starting to see signs (disturbing if they hold) that technology is starting to substitute for labor.

This relates to my first post of the semester, where I argued that as a country we’re in the unusual position of getting more output with less effort. Everywhere in our lives that’s considered a good thing, but when the macroeconomy does that … we’re no longer quite sure.

Part of this relates to an unusual change in who works. It used to be that the richer you were, the less likely you were to work: your income would be high enough that earning more wasn’t as worthwhile as having more leisure. This has changed over the last few decades: now the people who are the most productive work the most hours. Again … this is good in almost all contexts … but when it happens at the macroeconomic level, we’re not so sure.

This has led to a new and evolving problem: non-employment rather than unemployment. Consider the chart (sorry about the sizing, it’s embedded inside a very large frame):

The unemployment rate hasn’t changed that much over the last 60 years, but non-employment rate has increased fairly steadily.

The “what” of this is an amazing feat: we can support more people who aren’t working. That’s been a goal of human existence forever. But the “how” of this is problematic: how is it that, given that comparative advantage says there’s a role for everyone to specialize in something, we can’t find a worthwhile use of these folks’ time.

Summers’ explanation for this is that technology is allowing us to create capital that doesn’t complement labor, but rather substitutes for it.

Now, what makes economics a solid social science is when you take an assumption like that and figure out what new results emerge:

Real GDP will rise.

Wage will fall.

The share of GDP paid to owners of capital will rise.

Of course, this is the story of the last 30 years in the U.S. and many other countries.

Then, he splits his argument into three parts (and, I think, does a poor job of noting that for readers). There are:

Sectors where capital doesn’t substitute well for labor, because skills are important. This is the traditional story. People in these sectors do well when the macroeconomy gets richer. Think accounting.

Sectors where capital can substitute for labor, because skills don’t matter much. This is the new story outlined above. Here, production goes up, but incomes fall, and employment declines. This might work out well, unless our demand is limited for that production. Think agriculture.

Sectors that accumulate labor. By construction, this has to be ones that 1) don’t require too many skills, and 2) have weaker productivity gains so that demand isn’t readily met. Think healthcare.

Plausibly, the third sector becomes more important. But it also becomes expensive because productivity growth is hard to come by, making it easy to bid up prices.

People in the first sector do OK in this world. People in the second sector do badly, but they’re a vanishing breed. People in the third sector don’t do well either: their wages stagnate because productivity gains are hard to come by, but both the prices of their sector and the first sector may get harder to afford.

I’m not sure what to make of all of this. But I found it to be an interesting and provocative point of view.